What’s the Best Legal Structure to Start a Startup, and Why?

Legal-structure-startup

The word “startup” is often described by the assignment writing service UK based as a new business venture in which entrepreneurs and/or companies combine their skills, ideas, and resources to create a new business with a higher return. The appropriate place for the startup phenomenon is at the epicenter of the dynamic corporate culture. Starting with a legal framework is essential to moving forward and making it successful and functional. The purpose of this legal framework is twofold. 

  • First, it clearly establishes the rights and obligations of the parties working under the banner of Startups. 
  • Second, the goal is to protect the interest of the business. It provides a stable trading platform where disputes are minimized, services are explicit and risks are reduced.
  • WHAT IS THE LEGAL FORM OF THE COMPANY?

The legal structure of a business, also known as the place of business, is a government classification that governs certain aspects of a business. At the federal level, the legal form of business determines tax liability. At the state level, this may have liability implications. These ideas require just the perfect mind to write the business plan (thesiswritinghelp, 2010)

  • WHY LEGAL STRUCTURE IS REQUIRED TO START A STARTUP:

Choice of the right business structure from scratch is one of the most important decisions one can make. When researchers from the business community analyse factors that can trigger stress they emphasized some crucial things to consider that are mentioned below. This research uses insights from field theory to explore the early moments of how entrepreneurial ecosystems form through everyday interaction (Thompson, 2018)

  • Taxes:

 Sole proprietors, S corporation owners, and partnership owners report business income as personal income. C Business income is business income that is separate from the owner’s personal income. Due to the different tax systems for businesses and for personal income, the choice of structure can have a significant impact on the tax burden.

  • Liability: 

A Limited Liability Company (LLC) can safeguard personal assets in the event of a lawsuit. At the same time, the existence of LLC structures at the federal government level is not recognized. They exist only at the state level. C corporations are a federally incorporated business structure that includes LLC liability protection.

  • Paperwork: 

A legal business structure has separate tax forms. Someone structuring a business as a corporation, must also regularly file governmental reports and articles of incorporation. If a person forms a company and does business under a false name, he is required to provide certain documents for that too.

  • Hierarchy: 

Companies need to have a board of directors. Some states put this council under responsibility to meet a certain number of times a year. Corporate hierarchies also prevent the company from closing when an owner transfers stock or leaves the company, or when the founder dies. Other models do not have this lock protection.

  • Registration

The legal form of the company is also required for the registration of your company in the state. Without a business structure, a business cannot apply for an Employer Identification Number (EIN) or the required licenses and permits.

  • Fundraising: 

A legal structure also imposes restrictions on certain fundraising methods. For example, individual owners generally cannot offer shares. This right is mainly reserved for limited liability companies.

The choice of initial business structure is crucial, although the business structure can be changed in the future. However, restructuring a business can be a confusing and messy process that can lead to complications and unplanned downtime for the business. So the choice of the wrong business structure can be potentially harmful.

TYPES OF BUSINESS STRUCTURES:

  • Sole proprietorship:

The simplest and the most common one is individual ownership. Other than opening a company and providing a certificate in the name of the company, there are no other legal requirements, so there are no costs involved. . It is also a tax-friendly form of ownership, so all income and expenses are returned through an income tax return. The disadvantage is that you are liable for all debts and other obligations of the company. 

  • Partnership:

Whether a business has two or more people involved, a partnership can provide the right business structure. This may be a general partnership, in which all partners share management and business responsibilities, or a limited partnership, consisting of limited partners. The responsibility of a limited liability company lies solely with the partners. To avoid some of the formalities of a trade agreement and misunderstandings about roles and responsibilities, a partnership agreement is often helpful. 

  • Corporation:

The corporation is generally considered the best business structure for entrepreneurs who expect significant growth and are looking for personal protection from business obligations and debts. There are some pending regulations and administrative requirements that can be costly and time-consuming, but companies also have more opportunities to attract outside investors. On the other hand, companies are subject to double taxation, since the company itself is taxed, and profits, in the form of dividends, are also subject to the personal tax of the owners. 

However, another sub-type of a corporation that is also popular in circles is the commercial partnership. This corporate structure establishes the corporate commitment to moral, ethical, and responsible behavior in society and the environment.

  • Limited Liability Company (LLC):

The limited liability company shares the core benefits of corporations and partnerships. Forming an LLC allows enjoying the benefits of liability coverage and business taxation.

The legal consolidation or legal structure of a company has many implications. In this way, it becomes easy to determine the obligation that a company assumes in the event of lawsuits. This may create a barrier between personal and business taxes, or it may not be a barrier at all. Startups can also determine how often a plan should send documents or if it needs a plan. 

CONCLUSION:

This excerpt dealt with business structures and how to choose the right structure for an organization. It gives a good understanding of the organization’s short-term needs and the future state it is aiming for, as the experts guide it through many opportunities, risks, and what-if scenarios.

References

thesiswritinghelp. (2010, june 1). 10 Best Online Shopping Platforms in Pakistan. https://thesiswritinghelp.com.pk/top-10-e-commerce-platforms-of-pakistan.

Thompson, T. A. (2018, march 12). How entrepreneurial ecosystems take form: Evidence from social impact initiatives in Seattle. Strategic Entrepreneurship Journal 12.1 (2018): 96-116.